- MP Materials has been a stock I have long been bullish on, however they have laggard since my first publication.
- The Q1 Results were mixed and showed that there may be a weakness in the rare earth market moving forward.
- Production is strong, and the future expansion plans look to bolster earnings.
- Peers have recently been outperforming, which could become a bigger problem down the line.
MP Materials (NYSE:MP) has continued to build out its rare earth supply chain with a 3 step plan to vertically integrate the rare earth mining at their Mountain Pass location. The end goal for MP Materials is to support the electric vehicle industry through their primary product, NdPr magnets. These magnets are primarily used in EV motors and can even be used in military applications for guidance and control systems for missiles. This is a big reason why the DoD invested 35 million in MP Materials's operations. Additionally, NdPr can be used in wind turbines by making the cost of the turbines cheaper and lighter which has been a big problem in the past for companies looking to invest in the sector. However, there are still questions about the future of rare earth elements as a whole as the market for NdPr has deteriorated and MP Materials seems to be showing a growth slowdown. Currently, I rate MP Materials a hold but that could change in future quarters once we see consistent revenue.
Expanding the existing base of operations will be crucial for MP Materials since they need to show investors the power of their operations. Today, they aren't very vertically integrated because they still have a tolling agreement in place in Vietnam. For the uninitiated, a tolling agreement is when a mining company contracts out the refining of material to a third party for a fee. This increases costs and long term can present issues but for the short term, it is an efficient way to have a steady revenue stream. For now, the company is trying to vertically integrate with their Fort Worth magnet factory which can produce 1,000 tonnes of NdPr magnets per year for EV OEMs. While this may seem like a lot, MP Materials is producing 10,000 tonnes of NdPr at Mountain Pass so they need to ramp up their capacity quite a bit to meet production.
Q1 Financial Metrics
The biggest problem for MP Materials recently has been their lack of consistent earnings and revenue. The culprit here is most likely linked to the market for Neodymium. The sale price for Neodymium was 9,500 USD/MT falling from a price of 14,000 USD/MT in 2022. One positive takeaway I have from the financial metrics is that the EBITDA margin has remained somewhat consistent. To me, this signals that MP Materials is a good long-term investment because their fundamental operations are strong but they don't have those consistent orders yet to really be looked at as a compounding investment over time.
I believe the operating metrics were the most promising portion of the earnings presentation. Production volume remains consistent as well as sales volume. I would expect sales volume to increase in the coming quarters because of their pre-existing relationship with Sumitomo Corporation (OTCPK:SSUMY), one of the largest trading houses in Japan. Additionally, potential future orders from the DoD will also bolster, not only MP Materials' order size but their reputation as a leader in the production of NdPr globally. One nugget I took away from the earnings call related to future sales revenue is the amount of raw inventory MP Materials is sitting on waiting to be shipped to refineries.
As of Q1, we had consumed only a small portion of the nearly 2,000 metric tons of work in process inventory that will be used in commissioning of our refining circuits. With continued progress, we are preparing to feed material into additional refining circuits, which we're very excited about.
What that means is that starting in Q2, we would expect to process a significantly greater volume of our concentrate production through our refinery. Some of this inventory build will be in an investment in permanent work in process, while some will become separated rare earth oxides available for sale.
-Ryan Corbett, CFO of MP Materials
Source: (MP Materials Q1 2023 Earnings Call)
This may signal the potential for future earnings. One thing to look out for is the rising production cost. As costs rise and the realized price of NdPr falls there may be issues in terms of keeping up growth. I don't believe MP Materials will become extremely unprofitable, I just worry that future cash flows won't meet investor expectations.
How Production and Costs Will Affect the Future
The Production cost KPI breakdown more accurately explains my concerns with MP Materials. Doing some rough calculations, MP Materials produced 42,500 metric tons in 2022. Taking Q1 2023 sales of 10,215 and multiplying it by 4, we get 40,860 metric tonnes of NdPr sold in 2023. Now add realized REO/MT price of 9,365 in Q1 2023 and subtract production costs of 1,978 per metric tonne, MP Materials is left with a profit of $7,387 per metric ton. Adding in the 4 million for cost of sales through shipping and management compensation, MP Materials is looking at a gross profit of 301,832,820 with total revenue of 382,653,900. This is lower than the 2022 FY revenue of 527,500,000 and gross profit of 435,300,000. Obviously, these numbers aren't great but investors need to consider if the fear is priced in since the stock price hasn't performed very well.
Peer Stock Price Comparison and Future Risks for the Industry
The unstable revenues and earnings aren't new news. MP Materials has fallen -45.38% since last year. This is highly concerning for any company and should be looked at as a major negative by investors. No one really knows where the bottom is because MP Materials hasn't had consistent earnings as mentioned before. Comparatively, peer, Lynas Rare Earths (OTCPK:LYSCF) has an edge due to Lynas's exposure to other rare earth elements such as Lanthum and Cerium. While the rare earth market as a whole is struggling, the lack of diversification in production may pose a serious challenge for MP Materials moving forward.
Although I have been bullish on MP materials stock in the past, I must retract that opinion for now due to this weird limbo phase that they find themselves in. One of the ways I would change my conclusion is if the price of Neodymium reached previous 2022 levels and showed strong demand. I look forward to analyzing future earnings calls and seeing how revenue and gross profit develops over time.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.